Giant Bomb News

First Lawsuit Filed Over Zynga Insider Trading Claims

Suit alleges that top company brass "cashed out" ahead of falling stock prices.

This is a pretty serious story, so in order to relieve some tension, here's CEO Mark Pincus playing poker with a dog on top of a pile of presumably your money.

Casual games publisher Zynga has come under fire recently over accusations that top members of the company's executive team dumped company stock ahead of a massive drop last week. Five different law firms have been investigating Zynga and its corporate heads over possibilities that top brass may have violated federal insider trading laws, and now the first suit on the subject has been officially filed.

According to the suit (first acquired by The Verge), law firm Newman Ferrara is claiming that members of Zynga's executive team, including CEO Mark Pincus, had the company's underwriters--Goldman Sachs and Morgan Stanley--waive a restriction that would have prevented them from selling their stock shares prior to May 28 of this year. By waiving the restriction, Pincus and company were able to cash out over $500 million in stock while the price was at $12 a share this April. At the time of the lockup's expiration for other employees, the stock had dropped to roughly $6 a share. As of today, it's closer to $3.

"Zynga's regular employees were still locked up from selling their shares. But the guys at the top, who saw what was coming down the pipe, got to cash out," Ferrara attorney Roy Shimon explained to The Verge.

Pincus had apparently dodged a question regarding the unloading of his stock during last week's company earnings call, telling BTIG analyst Richard Greenfield, "We believe in the opportunity for social gaming and play to be a mass-market activity, as it is already becoming," instead of responding to his question.

As The Verge points out (by way of the New York Times), Pincus himself only cashed out a fraction of his total stock earnings, meaning he took a significant financial hit along with other shareholders. However COO John Schappert sold roughly 45% of his total stock, while CFO David Wehner unloaded more than half his shares.

I'll just go ahead and attempt to preempt the whole slew of inevitable "Zynga is evil" comments by asking a question. Um. Uh...so...are any of you still playing Words With Friends? Nobody accepts my invites anymore...

This is a pretty serious story, so in order to relieve some tension, here's CEO Mark Pincus playing poker with a dog on top of a pile of presumably your money.

Casual games publisher Zynga has come under fire recently over accusations that top members of the company's executive team dumped company stock ahead of a massive drop last week. Five different law firms have been investigating Zynga and its corporate heads over possibilities that top brass may have violated federal insider trading laws, and now the first suit on the subject has been officially filed.

According to the suit (first acquired by The Verge), law firm Newman Ferrara is claiming that members of Zynga's executive team, including CEO Mark Pincus, had the company's underwriters--Goldman Sachs and Morgan Stanley--waive a restriction that would have prevented them from selling their stock shares prior to May 28 of this year. By waiving the restriction, Pincus and company were able to cash out over $500 million in stock while the price was at $12 a share this April. At the time of the lockup's expiration for other employees, the stock had dropped to roughly $6 a share. As of today, it's closer to $3.

"Zynga's regular employees were still locked up from selling their shares. But the guys at the top, who saw what was coming down the pipe, got to cash out," Ferrara attorney Roy Shimon explained to The Verge.

Pincus had apparently dodged a question regarding the unloading of his stock during last week's company earnings call, telling BTIG analyst Richard Greenfield, "We believe in the opportunity for social gaming and play to be a mass-market activity, as it is already becoming," instead of responding to his question.

As The Verge points out (by way of the New York Times), Pincus himself only cashed out a fraction of his total stock earnings, meaning he took a significant financial hit along with other shareholders. However COO John Schappert sold roughly 45% of his total stock, while CFO David Wehner unloaded more than half his shares.

I'll just go ahead and attempt to preempt the whole slew of inevitable "Zynga is evil" comments by asking a question. Um. Uh...so...are any of you still playing Words With Friends? Nobody accepts my invites anymore...

Nope, I gave up on Words With Friends after it allowed bullshit words to work and get tons of points.

I stopped for the same reason. "Axelled" is not a word. (Unless it was accepting Swedish medical terms)

A car mechanic is late paying his illegal loan shark. The loan shark sends a shylark to the mechanic's place of work to collect the debt. The car mechanic, who is working beneath a large pickup truck's rear end, says he doesn't have it. Then the shylark drops the truck onto the mechanic. As the car mechanic writhes in agony, the shylark steps over to him and says, "You just got Axelled, bitch."

Maybe? I know their games have always been considered exploitative, but I don't recall hearing talk of shady business practice up till now.

Yeah, they're a bunch of uncreative hacks, but this is the first time I can think of them doing something explicitly illegal or "evil". They've never been a moral (people always forget moral and legal are different things) company, but not villainous.

That's super shady. Throw the book at em. I thought I was gonna love Words With Friends but my disinterest in tapping random letter combos to try to score huge points like my friends were doing killed that game for me. I'm on that Hero Academy tip. I'm all about it.

I had heard he cashed out, but I had written it off before. Don't a lot of entrepreneurs do that? Set up a company, get big, go public, sell out? However, the lockup being waived just for the folks at the top makes it way sketchier. That's not cool.

In the 6 years i have had FB i have wanted to delete it just about every day. I hate it and don't want it but i have a lot of out of city/state friends/family that use it and it's just easier to talk to them over FB then it is to email.

Glad to see the bubble is about to burst. Their stock was grossly overvalued, just like facebook's. Even "casual gamers" can only play so many social online games before getting tired of the whole "get ripped off or die grinding"-scheme.

it sucks that people use IPOs to cash out. This is the tech bubble same as before with delayed results. I say of course 80% of the clicks of facebook ads are bots! Do you know anyone who actually clicks on facebook ads?

I had heard he cashed out, but I had written it off before. Don't a lot of entrepreneurs do that? Set up a company, get big, go public, sell out? However, the lockup being waived just for the folks at the top makes it way sketchier. That's not cool.

It sounds like they were just aware of what everyone else was, that the company was not going to be doing so hot in the future. I'm not sure what the legality is of waiving that restriction, but if that is perfectly acceptable then it looks like they can't be held accountable for any wrong doing. Everyone knew the company was in a downward spiral, that was public knowledge 6 months ago. So, just because Zynga is an evil company doesn't mean they can't be smart enough to get some money out of their shitty company before it goes under.

Man what sucks is these guys will look forward to a white collar prison, or known as the "CEO's time-out play palace" That's what sucks about high dollar crime. Also Alex I'll accept your invites, but I warn you I use a lot of bullshit words!

It sounds like they were just aware of what everyone else was, that the company was not going to be doing so hot in the future. I'm not sure what the legality is of waiving that restriction, but if that is perfectly acceptable then it looks like they can't be held accountable for any wrong doing. Everyone knew the company was in a downward spiral, that was public knowledge 6 months ago. So, just because Zynga is an evil company doesn't mean they can't be smart enough to get some money out of their shitty company before it goes under.

Insider trading is still a crime regardless of the trading restriction.

Nope, I gave up on Words With Friends after it allowed bullshit words to work and get tons of points.

I stopped for the same reason. "Axelled" is not a word. (Unless it was accepting Swedish medical terms)

A car mechanic is late paying his illegal loan shark. The loan shark sends a shylark to the mechanic's place of work to collect the debt. The car mechanic, who is working beneath a large pickup truck's rear end, says he doesn't have it. Then the shylark drops the truck onto the mechanic. As the car mechanic writhes in agony, the shylark steps over to him and says, "You just got Axelled, bitch."

I had heard he cashed out, but I had written it off before. Don't a lot of entrepreneurs do that? Set up a company, get big, go public, sell out? However, the lockup being waived just for the folks at the top makes it way sketchier. That's not cool.

I'm no economist so I'm probably talking out of my ass here, but what you're thinking of is the venture capital model. A company or individual invests money into a private startup business with the intent to gain profit through an eventual sale or merger. That's completely legal and common and is in fact pretty much exactly what happened to Giant Bomb and all the other Whiskey Media sites back in March.

This is insider trading, which means financial officers within Zynga, a publicly traded company, used non-public information for profit. In this case, they knew their stock prices were about to plummet before their shareholders or employees did, and used that to cash in. That's illegal. And generally just a scummy thing to do, though Zynga has a history of scummy practices from practically the word "go."

From what I've read, their defense so far is probably going to be that the stock crashed because almost everyone responsible for the company pulled most of their personal stakes. Which makes a lot of sense, considering that most traders are news traders, or think they are at least.